In our previous blog, we spoke about CAM & tax billing errors and why the possibilities of such errors make it imperative to have a well-defined Right to Audit in the lease. But the tenant’s auditing rights can be ambiguous and limited. To address these issues, a clear understanding of the various levels of audit rights and limitations is required. In this blog, we explore the different levels of audit rights every tenant should be aware of.
- No audit rights: In this option, the tenant has waived all rights to conduct a CAM & tax audit. It is in the best interest of a tenant to avoid waiving off audit rights even though the landlord has a reputation for keeping the accurate, reliable accounts.
- Audit right is silent: The lease is silent regarding audit rights. However, this doesn’t mean the tenant cannot verify the expense amount or the reconciliation statement provided by the landlord. In case discrepancies are found in the audit, the tenant should negotiate the terms of the audit rights and the compensation to be received. The best time to do this is when the lease is being drafted, renewed, or amended.
- Limited audit rights: The lease will state the conditions and limitations of the audit rights. For instance, limitations may include the time period within which the audit can be conducted and concluded, or who can audit the reconciliation statements and bills of expenses. The landlord might be in favor of hiring a law or accounting firm whereas the tenant might be interested in appointing a contingency fee-based auditor who can identify discrepancies in the billing. Other limitations include the place where the audit may be conducted and the type of bills that can be audited by the tenant.
- No limit audit rights: This is an ideal situation for the tenant, as it provides the most control for the tenant over the accuracy of all accounts.
Though inconsistencies in billing can be a result of human error, and even though the tenant may prefer to rely on the landlord’s oversight, it is a good practice to have a provision for a Right to Audit in the lease.